Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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Sincethepremium isaweighted averageof thepremiums
demandedbyindividualinvestors,oneapproachtoestimating
thispremiumistosurveyinvestors abouttheirexpectations
forthefuture.Itisclearlyimpracticaltosurveyallinvestors;
therefore, most surveys focus on portfolio managers who
carrythemostweightintheprocess.Morningstarregularly
surveysindividualinvestors aboutthereturntheyexpectto
earninvestinginstocks.MerrillLynchdoesthesamewith
equityportfoliomanagersandreportstheresultsonitsweb
site.Whilenumbersdoemergefromthesesurveys,veryfew
practitionersactuallyusethesesurveypremiums.Thereare
three reasons for this reticence:



  1. There are no constraints on reasonability; survey
    respondents could provide expected returns that are lower
    than the risk-free rate, for instance.

  2. Survey premiums are extremely volatile; the survey
    premiumscanchangedramatically,largelyasa functionof
    recent market movements.


3.Surveypremiumstendtobeshort-term;eventhelongest
surveys do not go beyond one year.


Historical Premiums


Themostcommonapproachtoestimatingtheriskpremiums
used in financial asset pricing models is to base them on
historicaldata.IntheAPMandmultifactormodels,theraw
dataonwhichthepremiumsarebasedishistoricaldataon
assetpricesover verylongtimeperiods.IntheCAPM,the
premiumiscomputed tobethedifferencebetweenaverage

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